IMPORTANT UPDATE to the SBA PPP (Paycheck Protection Program) and EIDL (Economic Impact Disaster Loan) – April 14, 2020
CARW’s good friends Lorry Rifkin from Clarity Management and David Kircher from Phoenix Financial Advisors have given us another update on the evolving SBA COVID loans programs. They have volunteered many hours helping CARW prepare these webinars and answers to generic questions.
If you need customized help in your situation beyond what they have shared please contact them. Here is the PPP form link.
- The EIDL will be capped at $25,000 plus $10,000 grant
- Partnerships will file at the partnership level for PPP
- Independent Contractors rules have now changed. You still have to use your filed or estimated Schedule C. The maximum forgiveness is 8/52 of 2019 Schedule C capped at $15,385
- It is unclear if plus mortgage interest, rent payments, and utility can be added to that amount – we are waiting for clarification.
- You still need to document and you must submit evidence of business rent, business mortgage interest, payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes. These must be claimed on schedule C or not allowed
- More information from SBA: HERE
- The PPP still has 6 months of payment deferral.
- Interest accrues during that period.
- It is unclear if the loan is amortized after the 6 month deferral or a balloon after 24 mos – we’re waiting for clarification.
- You can always prepay so you are not owing a large payment if it is a balloon.
After you get your loan they recommend these 5 steps too:
Step 1 Do not spend a penny until you have a plan.
- That means understand what the money can be used for and how you will document it.
- And be realistic how your business will be able to return to normal in the post loan period especially in the first 2 months.
Step 2 Develop an 8-week plan for your payroll including benefits.
- Determine who and how you will bring people back so you optimize your head count and payroll dollars during this period. This will help maximize your loan forgiveness is done right. I have one customer who will be hiring 5 extra salesmen during this period so he can bring back regular employees.
- Consider making a retirement or profit-sharing contribution during this period not after.
Step 3 Develop an 8 week plan to determine your covered rent mortgage interest and utility.
- Some people pay rent, mortgage interest and utilities up to the due date or grace period. Make sure they all fall within the 8-week period.
Step 4 Calculate your non forgiven loan payments which begin 6 months after you get the loan.
- Calculate the non-forgiven amount and take actions to ensure you can pay it back. Do not wait till the end in case it’s a balloon payment.
Step 5 Implement your plan to optimize loan forgiveness.
- Don’t leave your plan on a piece of paper in your desk. Implement the above to restart and retool your business from the loans you get. The post COVID environment will change.
ORIGINAL ARTICLE PUBLISHED APRIL 9, 2020:
Small business is the backbone of our American economy and employs 56.9 million people throughout the country. In order to keep the small businesses operating while the economy is shut down, the President signed into law, the $2.2 trillion CARES Act which includes tax changes, insurance changes and loan programs through the SBA (Small Business Administration). Nearly $350B has been allocated to the PPP (Paycheck Protection Program) and EIDL (Economic Impact Disaster Loan) Program. Congress seeks to expand the amount available based on immediate term interest in the loans.
The EIDL program is available now and the PPP for independent contractors opens on April 10th. We expect to see some changes and guidance given even as the program is launched for independent contractors. On April 8th, CARW hosted a webinar with panelists David Kircher and Lorry Rifkin, CPA to discuss the frequently asked questions from CARW members.
It is important to note that the SBA programs have been designed to act as a bridge for companies to carry expenses during this abnormal time. They are meant to help businesses keep employees on their payrolls, pay rent and other business expenses. Both programs are meant to cover expenses – NOT loss of revenue.
When we apply the mechanics of the PPP and EIDL programs to independent contractors, it is important to note that an independent contractor who files a schedule C will use the net operating income line as ‘payroll’. Important considerations for independent contractors to consider include: will you be able to show revenue equal to or greater than the previous year’s two months in the 8 weeks following receipt of the loan? This requires practitioners to think carefully about what their businesses will look like post COVID-19 and how they are positioning themselves to collect or pay back the unforgivable amount, which would be that which is not made at the end of the 8 weeks.
Some have suggested that it is counterintuitive for someone to have to repay a loan if they do not generate revenue – they show more need – don’t they? Well, maybe they do, however the purpose of the program is to help businesses and independent contractors, by extension, carry expenses during this time. Independent contractors were not originally able to apply for the loans, but are now. Changes will continue to be made, even as this document is written.
Our panelists offered advice in their concluding remarks including “have patience” and “be prepared”. Read more questions below and view the webinar for the original presentation. Note that the questions asked in the presentation are different than the ones written below.
There were a number of questions covered in the presentation and below are others that have come up since the call:
1Q: On the form, the first “question” under certifications it states “this loan request is necessary to support ongoing operations. Is there a risk for the PPP loan that is you do receive or have a money in the bank, you could be subject to a fine or penalty in obtaining the loan?
A: No. Having other sources of funds does not disqualify you. If you use the funds you get for the intended purpose you should be fine.
2Q: Can an independent contractor apply for the PPP and EIDL?
A: Yes, an independent contractor can apply for both loans. However, if they are receiving the PPP for payroll (revenue), your EIDL must be for other purposes like working capital, AP or other non-payroll expenses. EIDL has a grant amount of $10,000. An employer is unable to claim PPP for independent contractors or commission payments.
3Q: Are SEP payments included for independent contractors, since 401k would be for a business?
4Q: What if you have blended 1099 income and W2 income?
A: Schedule C income and W2 = total income
5Q: Is the same PPP form going to be the same for independent contractors as it currently is for small business.
6Q: Where can you obtain the forms?
A: *EIDL: https://covid19relief.sba.gov/#/ – Apply directly through SBA
** Note that the PPP loan is processed through a lender. Be sure to check with your existing bank on details for their loan application process.
*Be cognizant of supporting documents (see checklist)
7Q: As an independent contractor, how is the loan forgivable if you’re paying yourself?
A: The loan can be 100% forgivable based on your post loan 8 weeks net income compared to 2019.
8Q: Do independent contractors need a business account through their bank to apply for the PPP loan?
A: Not necessary, but it is helpful for independent contractor applying for the PPP loan to have a checking account or relationship with a bank. There are some banks who may work with non-clients. The order of priority in processing applications is that they are likely to service their existing borrower clients first, depository only clients second, then non-bank customers third.
9Q: Myself and five others Are Members in an LLC that owns rental real estate. We have zero employees, and zero payroll expense. We have rental income and rental operating expenses. We have a mortgage. The Owners have, in the past, taken distributions. Are we eligible for the PPP or the EIDL? Can funds under either be used for debt service?
A: Likely best option would be EIDL for LLC operating expenses and working capital.
10Q: As a broker – if you are able to maintain your same level of commission as the previous year – why do you need a loan in the first place? How would the change in income impact the amount that is forgiven?
A: The program is meant as a bridge to carry expenses during this abnormal time. If you feel that business will not be the same going forward, it may be best to go over your situation with your banker to discuss options.
11Q: Can brokers claim unemployment and take a PPP Loan, and does this reduce the amount you can loan?
A: No. Independent contractors should make the determination on which is better for their business. We are hearing that the guidance on unemployment insurance will not be out for several weeks and that the money paid will be postdated to Mid-March. The final decision may change.
12Q: Is it better to work with a small bank or a large bank?
A: Wherever you have the relationship should be your first and best choice. Be sure to ask how long it is taking to process loans for approval and for funding. Ask if the process is automated and if it is necessary to open a separate account for the proceeds.
13Q: Will you be taxed on loan forgiveness?
14Q: With the PPP loan I have a new agent I pay with a draw amount, is that considered payroll or independent contractor income?
A: All draw and payments to an independent contractor are considered non payroll 1099 income to them. You cannot claim it as a PPP payroll expense.
15Q: As an independent contractor, if I make less money during the 8 week period following a PPP loan compared to last year, then the loan forgiveness will be less. That seems to be counterintuitive. The reason I’m making less is due to the virus……….
A: Yes, that may be counterintuitive. Consider that the purpose and original intent of the program is to serve as a bridge for businesses to cover their expenses. For independent contractors and sole proprietors with zero employees, The regulation defines “payroll costs” as wage, commissions, income, or net earnings from self-employment or similar compensation The independent contractor provision was added on the bill in the end and some parts are counterintuitive, but it is how it is written as of April 9, 2020. This is why the EIGL might be a better choice in this circumstance to cover expenses. Click HERE for more information and sample calculation.
16Q: This structure doesn’t make sense to me – if you make the same amount over the next 8 weeks your loan will be forgiven but it needs to be repaid if you make $0? The latter has been impacted whereas if you make the same amount, you haven’t show a need/impact?
A: Same answer as 15.
17Q: If I am a broker with a very part time employee and work from home, should I apply for unemployment or use one the SBA programs?
A: More information is needed on your situation to answer this.
18Q: If you are the sole member of an LLC you are a disregarded entity for IRS. Do you qualify?
A: Yes you would schedule C net profit to calculate your PPP loan or apply for the EIDL.
19Q: As an independent contractor, how does the commission we receive during the 8 week period after the loan is processed affect the forgiveness?
A: The commission during the 8 weeks following the receipt of the loan would be used to determine your net profit and be compared to your 2019 net profit to determine the level of forgiveness.
20Q: In an LLC Partnerships – are draws treated as income?
A: If you are an employee or 1099 and get and draw on your future commissions and you sign an agreement that you will have to pay it back if you leave its non-taxable. If you don’t have to pay it its taxable income. If you are a pass thru entity like a partnership, llc or subchapter S Corp you pay taxes on your business earnings whether you take the money out or not. So if you take a draw its generally tax free.
21Q: If I am a young broker – worked half the year last year – made $40k, this year they haven’t made anything – how does that work?
A: In this situation it is dependent on what you make in the 8 week period after they get a loan. They can still do PPP (I would use average pay for months they worked), if no income, none will be forgiven, and they will have to pay it back in 24 months. Or they can do EIDL for eligible expenses or working capital and pay back in 30 years.
22Q: What if someone was an employee last year and is an independent contractor this year?
A: They can only do EIDL and pay back any expenses they borrow or working capital they need until pay comes in and pay it back in 30 years.
Disclaimer: These answers are based on the best information available at this time. The program and how it is implemented is still being changed by the Treasury Dept. and SBA. Each individual or business situation is different and for a more definitive answer seek outside assistance.
For more information, contact David Kircher or Lorry Rifkin, CPA
Owner Phoenix Financial Advisors LLC
Email: [email protected]
Linked in: linkedin.com/company/phoenix-financial-advisors-llc/about/
About The Speaker:
David has been in banking, private business and Economic Development Financing since 1974. He’s a former commercial Banker with Marine/Chase & M&I/BMO and has 20 Years with Wisconsin Business Development – the State’s largest SBA 504 Lender. He is the owner/president of Phoenix Financial Advisors, LLC, established in 2016. He is the 2014 & 2019 WEDC Governor’s “Community Business Development” Award and 2016 SBA “Wisconsin Small Business Champion” Award. David is active on numerous Economic Development Organization Committees. B.A. in Communication Arts from UW Madison. MBA Graduate studies at UW Milwaukee.
About The Speaker:
Lorry Rifkin, CPA has almost 40 years of general business experience. His expertise ranges from accounting, operations, sales, and marketing as an owner and employee. He has done extensive work in crisis situations doing business turnarounds which is like the COVID business environment we face today. Your business will need to retool Post Covid. Lorry can help you do that in a profitable manner. He is a generalist in approach and though process. A critical thinker and agent of change. His personality can provide the details to build a reality that does not exist yet, staff it, write the operating procedures and train the staff.
What Schedule C (Form 1040) Is & Who Has to File It in 2020
If you freelance, have a side gig, run a small business or otherwise work for yourself, you may need to fill out IRS Schedule C at tax time. Here’s a simple explainer of what IRS Schedule C is for, who has to file one and some tips and tricks that could save money and time.
What is Schedule C?
IRS Schedule C is a tax form for reporting your revenue and profit from a sole proprietorship or single-member limited liability corporation. You fill out a Schedule C at tax time and attach it to, or file it electronically with, your Form 1040. The title of IRS Schedule C is “Profit or Loss from Business.”
Who needs to file Schedule C
- Schedule C is for sole proprietors — very often the choice of people who freelance, have a side gig, are independent contractors or operate a business by themselves. Sole proprietorships are unincorporated businesses that are owned and run by one person who is entitled to all of the profits and is responsible for all of the losses and liabilities.
- Schedule C is also for single-member limited liability corporations. A single-member LLC is a business entity owned by just one person. In most cases, there’s no distinction between the owner and the LLC for income tax purposes; the business’s income and profits go right onto the owner’s personal tax return.
- This schedule is not for C corporations or S corporations, however. So if you’ve incorporated your business that way, you’ll need to use different forms.
- You may have to file a Schedule C even if you have a regular day job where you’re someone’s employee. So if you’re working full-time for “The Man,” but you’re freelancing on the side, your self-employment means you’ll probably need to add the Schedule C to your to-do list.
- For tax purposes, the IRS says you’re in business if you’re pursuing your gig continually and regularly in order to make money.
- If your side gig is farming, you may need to fill out Schedule F.
- If your side gig involves rental income or royalties, you may need to fill out Schedule E.
How to fill out Schedule C
Schedule C is a place to report the revenue from your business, as well as all the types of expenses you incurred to run your business. Your business income minus your business expenses is your net profit (or loss). You then report your net profit as income on your Form 1040.
Here’s some stuff you’ll need:
- Your income statement and balance sheet for the tax year.
- Receipts for your business expenses.
- Inventory records, if you have inventory.
- Mileage and other vehicle records if you used one for business.
And here’s the basic structure of Schedule C:
- Part I is where you tally your sales and report your cost of goods sold so you can see your gross profit.
- Part II is where you report your business expenses. There are over a dozen categories to help you stay organized, such as advertising, car and truck expenses, legal and professional services, rent, travel and meal expenses and other costs. The instructions for Schedule C explain the rules for each type of expense. You’ll add up all the expenses and subtract them from your gross profit to arrive at your net profit, which is taxable income for your personal tax return. If you have a net loss, it may be deductible on your personal tax return.
- Part III helps you calculate your cost of goods sold.
- Part IV is a place to report certain information on a vehicle if you have car-or truck-related business expenses.
- Part V is a place to list other business expenses that didn’t fit into the categories in Part II.
Schedule C tips and tricks:
- Most name-brand tax software providers sell versions that can prepare Schedule C. Although you’ll likely need to purchase the highest-end version to get Schedule C functionality, that still might end up costing less than paying someone else to do your taxes.
- You may need to fill out more than one Schedule C. It’s one Schedule C per side gig. So if you have two side gigs, you’ll need to fill out two Schedule Cs.
- Measure your home office’s square footage. If you have a home office, you can probably deduct some expenses associated with keeping it up and running if you’re self-employed. The IRS offers a flat-rate deduction of $5 per square foot for up to 300 square feet of home office space. But if a big percentage of your home’s square footage is dedicated to your home office and your home expenses (utilities, etc.) are high enough, and you’re able to keep and compare detailed records, you might get a bigger deduction with the “regular” method.
- Be sure to take advantage of other tax deductions. Self-employment can score you a lot of tax deductions (here are five popular ones), and one of the newest is the qualified business income deduction. If you qualify, you can deduct up to 20% of your business’s net income on your tax return. See if you can take this deduction.
- Make estimated quarterly tax payments to avoid penalties. Taxes are a pay-as-you-go arrangement in the United States; when you earn money, the IRS wants its cut as soon as possible. That’s why employers withhold taxes from employee paychecks. But when you’re paying yourself, that’s probably not happening. To avoid late-payment penalties, you can make estimated quarterly payments to the IRS.
Schedule C (2019): HERE
Other Useful Resources:
- How To Calculate Payroll Costs For Your Paycheck Protection Program Loan – Forbes: HERE
- Paycheck Protection Program – what it is and how to apply – Investopedia: HERE
- FAQs – Paycheck Protection Loans and Economic Injury Disaster Loans – National Law Review: HERE
- Overwhelmed? Plain Talk On The Paycheck Protection Program For Small Businesses Affected By COVID-19 – Forbes: HERE